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Collective Learning Series Transfer Pricing Review Guidelines - ASC 740 Uncertainty in Income Taxes In this weekly series, CAPAM Consulting will explore key areas for tax and audit professionals to consider when reviewing TP arrangements for financial statement audit purposes under Accounting Standards Codification (ASC) 740 (formerly FIN 48). ASC 740 provides guidelines on how companies should account for income taxes in their financial statements under US GAAP, focusing on uncertain tax positions that could impact investors and stakeholders. While we are no experts in ASC 740 particularly, the purpose of this discussion series is to explore practical and logical guidelines that will help protect your firm’s reputation and from unwarranted risks. Guidelines # 1 Transfer pricing review is not just about the policies but rather the implementation or financial impact of the policies The whole purpose of the audit is to test the policies by reviewing the policies’ desired outcome on the financial statements, and not just the policy itself. You may come across situations where a company has established requisite TP policies for the intercompany transactions undertaken but may not have implemented it correctly or not implemented altogether which will create a tax exposure. So, if you were to simply review the policies but not test it (much like what we do for compliance documentation purposes) then you are missing out on the potential exposure under ASC 740 which will expose your practice to various risks. Documents to review  Prior year’s compliance documentation, if available  Any TP policy documentation (benchmarking, memorandums, etc.) prepared for establishing TP policies  Any supporting documentation prepared for a specific TP position taken by the company  Intercompany agreements (extremely important for material transactions)  Financial statements to test the policies I would love to get any feedback from other professionals in this area for collective learning. Other guidelines will be posted soon.

Collective Learning Series Transfer Pricing Review Guidelines - ASC 740 Uncertainty in Income Taxes This is the second installment of series where CAPAM Consulting will explore key areas for tax and audit professionals to consider when reviewing TP arrangements for financial statement audit purposes under Accounting Standards Codification (ASC) 740Guidelines Guidelines # 1 Testing the TP Policy – ASC 740 review for TP is not just about reviewing the policies but rather the implementation or financial impact of the policies. (Covered here: https://lnkd.in/eEhVKq6q) # 2 Coverage of Multiple Years ASC 740 review for TP isn't limited to the financial year for which the statements are issued. It must consider all applicable years within the statute of limitations, ranging from 3 years (general) to indefinite (in cases of fraud or failure to file). When conducting a TP audit, whether for a new client or as a new auditor for an existing client, it’s essential to look beyond the current year. While testing current financials may confirm the validity of the present TP arrangement, it may not capture potential historical exposure from previous years, particularly if past TP adjustments or testing procedures were overlooked, or if there’s been changes in the TP models. Given that companies evolve due to technological advancements and regulatory changes, reviewing historical arrangements is critical to ensure a comprehensive audit. This kind of diligence might seem redundant, but it’s a necessary safeguard against the subjectivity and complexity inherent in TP, protecting both your firm’s reputation and its risk exposure. Documents to review: ·      Prior audit memos and workpapers ·      Correspondence from past audit kick-off meetings, which often summarize company updates ·      Any change in TP policies or transactions for the prior 3 years (depending on the statute of limitations) ·      Historical TP policy documentation (benchmarking, memorandums, etc.) for testing previous arrangements and identifying changes in the TP models ·      Justification for changes in TP policies, if applicable ·      Updates to intercompany agreements to reflect policy changes ·      Financial statements from prior years for historical testing, if relevant I would love to get any feedback from other professionals in this area for collective learning. Stay tuned for the next installment in the ASC 740 – TP review series.  

Collective Learning Series Transfer Pricing Review Guidelines - ASC 740 Uncertainty in Income Taxes This is the third installment of series with CAPAM Consulting Guidelines # 1 Testing the TP Policy (https://lnkd.in/dHvgqu6e) # 2 Coverage of Multiple Years (https://lnkd.in/dusdhYzj) # 3 Identify Unknown or Hidden Transactions ASC 740 review for TP isn't limited to reviewing the i/c transactions that the taxpayer has identified and have documentation for, the auditor must also consider i/c transactions that have not been identified by the taxpayer to determine tax risks which is highly likely to trump the audit materiality thresholds. When conducting TP review, it's crucial for TP auditors to look beyond just the documented, known transactions. Assuming the TP policies and implementation for the known transactions are accurate, what about the transactions that should have been there but are not? Taxpayers often focus solely on updating documentation covering existing transactions and may overlook any new developments within the company or historical developments that were missed out in the prior cycles of documentation (yes, it does happen). This can lead to the omission of unknown transactions which have not been formally identified and therefore lack appropriate TP policies. Examples of some of the common “unknown” transactions that you may encounter are management services in a principal-principal structure, licensing arrangement for IP newly developed or developed historically, financing arrangements, long overdue AR/AP, among others. These gaps present significant audit risks, as unidentified transactions may expose the company to material tax assessments a

Collective Learning Series Transfer Pricing Review Guidelines - ASC 740 Uncertainty in Income Taxes This is the third installment of series with CAPAM Consulting Guidelines # 1 Testing the TP Policy (https://lnkd.in/dHvgqu6e) # 2 Coverage of Multiple Years (https://lnkd.in/dusdhYzj) # 3 Identify Unknown or Hidden Transactions ASC 740 review for TP isn't limited to reviewing the i/c transactions that the taxpayer has identified and have documentation for, the auditor must also consider i/c transactions that have not been identified by the taxpayer to determine tax risks which is highly likely to trump the audit materiality thresholds. When conducting TP review, it's crucial for TP auditors to look beyond just the documented, known transactions. Assuming the TP policies and implementation for the known transactions are accurate, what about the transactions that should have been there but are not? Taxpayers often focus solely on updating documentation covering existing transactions and may overlook any new developments within the company or historical developments that were missed out in the prior cycles of documentation (yes, it does happen). This can lead to the omission of unknown transactions which have not been formally identified and therefore lack appropriate TP policies. Examples of some of the common “unknown” transactions that you may encounter are management services in a principal-principal structure, licensing arrangement for IP newly developed or developed historically, financing arrangements, long overdue AR/AP, among others. These gaps present significant audit risks, as unidentified transactions may expose the company to material tax assessments and penalties. Auditors should therefore remain vigilant in identifying these unknowns to ensure a comprehensive audit and to mitigate risks. Documents to review to identify unknown transactions: ·      Review publicly available information such as company’s website, investors relations, annual reports, news, etc. to understand the changes that have happened in a company ·      Company’s detailed organization chart (both structural and personnel) ·      Review functional analysis and compare it with the information gathered from above ·      Financial statements, existing and prior years to understand the cost and revenue structure I would love to get any feedback from other professionals in this area for collective learning. Stay tuned for the next installment in the ASC 740 – TP review series. #TransferPricing #InternationalTax #armslength

The Tale of Unearned Revenue and Tax Implications: A Critical Lesson for Finance Professionals Imagine a company that receives payments in advance for services that will be delivered in future periods. At first glance, this seems like a positive cash flow scenario. However, lurking beneath this financial transaction lies a nuanced accounting and tax challenge: unearned revenue. Unearned revenue, by definition, represents a liability rather than income. This is because the company still owes the service or product to the customer. As per accounting principles, revenue is only recognized when it is earned, often deferring a portion of this income to the next financial period. This practice ensures that financial statements present a true and fair view of a company's performance and financial position. But here’s where it gets interesting. When it comes to tax filing, the rules often differ. Tax laws may require the company to recognize income in the year it is received, regardless of when it is earned according to accounting standards. This discrepancy between book income and taxable income can have significant implications, especially when seeking tax refunds. Key Takeaways for Finance and Tax Professionals: 1. Understand the Differences: Be aware of how unearned revenue is treated under accounting standards like IND AS/IFRS compared to tax regulations. The variance can affect your company's taxable income and overall tax strategy.    2. Impact on Tax Refunds: Since tax authorities might not recognize the deferral allowed in financial accounting, you may be restricted from claiming a full refund. Only the revenue portion recognized in the current financial year may be eligible, affecting cash flow planning.    3. Disclosure Matters: When filing tax returns, remember that unearned revenue must be appropriately disclosed. Income tax forms often require detailed reporting of deferred revenue, and accurate disclosures are crucial for compliance and avoiding potential audits. The Bigger Picture: Proper revenue recognition and understanding tax regulations are essential for effective financial management. They influence not just the company’s financial reporting but also strategic decisions related to tax planning and cash flow. Have you faced similar challenges in revenue recognition and tax filings? I’d love to hear your insights and approaches to navigating these complex situations. Let's start a conversation and share knowledge! #Finance #Accounting #Tax #RevenueRecognition #CashFlow #TaxPlanning #FinancialManagement #INDAS #IFRS #TaxCompliance #UnearnedRevenue #Audit #CFO #FinancialStrategy #BusinessInsights #TaxFiling #DeferredRevenue

This is a sage reminder for not only the so-called Next 5,000 but any growing SME. Ensuring that you are meeting all of your tax obligations means investing time and resources to ensure that your accounting and reporting systems grow with you. Boring stuff? Probably, but it's here that good governance meets prudent business practice. A good accounting and reporting system, and a good relationship with your accountant will mean that you can always produce, understand and act upon the information you not only need to be and remain compliant but to make the good decisions that help you to keep growing. #SME #Tax #Accountant https://bit.ly/4b8nfzM

Choosing between the cash method of accounting and the accrual method for tax purposes can impact your tax situation. But not all businesses qualify for both methods. #cashmethod #accrualmethod #accountantswithpersonality #livingourcorevalues #HH

Generally, a business student going into accounting will devote themselves to studying either GAAP rules or taxable income rules. That is, they either become a financial statement auditor or a tax person. And happily, for each these two complex worlds generally don’t collide. GAAP has its accounting methods, and the Internal Revenue Code has its separate accounting methods. It is difficult enough becoming an expert in one or the other. Controversially, the U.S. income tax system now imposes a minimum tax on mega-mega corporations (“MMCs”) based on their adjusted GAAP income. The general intent of the rule, (whether one agrees or disagrees with it), is easy enough to understand, MMCs that report rosy profits to the markets and negligible taxable income to the IRS ought to be forced to pony up some tax. The proposed regulations contain a surprising number of new concepts, including addressing when an MMC invests in a partnership. The proposed regulations force MMC tax people to simultaneously understand and fuse together GAAP reporting rules (or IFRS reporting rules, etc.) and these endlessly detailed corporate minimum tax regulations. And they drag unsuspecting partnership tax people into the entire mess under the proposed regulation's self described "bottom up" approach. This growing trend of our worlds colliding is unsettling. 😨

As a Finance Manager or Accountant, we often face the challenge of preparing financial statements while also making sure our firm's tax obligations are fulfilled. This can be difficult because accountants usually look at every report from an accounting perspective. However, for effective tax planning, it's important to understand the difference between tax accounting and financial accounting. One may ask, if there’s a difference between tax accounting and financial accounting. YES, tax accounting is different from financial accounting. For tax compliance purposes, it is important to note that financial accounting and tax accounting are two distinct branches of accounting that adhere to different rules and guidelines on some issues. While Financial accounting is focused on the provision of true and fair view of the organization’s financial performance and position to stakeholders, the purpose of tax accounting is to comply with tax laws and regulations and to accurately calculate and report taxable income and tax liabilities per such laws and regulations. Tax compliance generally means accurate financial reporting of income and expenses, accurate computation of tax liabilities, filing of tax returns on time and payment of taxes on time. When we are clear on tax accounting, complying with tax laws happens naturally. To be tax compliant, one must be familiar with tax laws such as Income Tax Act, 2015 (Act 896), Value Added Tax Act, 2013 (Act 870), Income Tax Regulations, 2016 (L.I. 2244), etc. It is very important for businesses to be familiar with different tax laws and regulations that apply to their organization. Being aware of the tax laws that apply to your organization allows for proper tax planning. The lesson here for us Finance Managers, Accountants, and Internal Auditors is to understand the boundaries between tax accounting and financial accounting in order to ensure tax compliance. It is essential to stay informed about tax laws and any changes in order to avoid violating regulations and facing penalties. More distinctions between tax accounting and financial accounting are in the comment section for your perusal. #TaxCompliance #TaxAccounting #FinancialAccounting #TaxLaws #BusinessAccounting #TaxRegulations #AccountingStandards #FinancialReporting #TaxLiabilities #AccurateReporting